1. Human Resource Management: Gaining a Competitive Advantage
Chapter 8
Performance Management
Performance management is the process through which managers ensure that employees’ activities and outputs are congruent
with the organization’s goals and is central to gaining competitive advantage.
Chapter 8, Performance Management, examines a variety of approaches to performance management, provides a brief summary of current performance management practices, presents a model of performance, discusses specific approaches to performance management and the strengths and weaknesses of each and various sources of performance information. The errors resulting from subjective assessments of performance are presented, as well as the means for reducing those errors and some effective components to performance feedback and addresses components of a legally defensible performance management system.
McGraw-Hill/Irwin
Copyright © 2010 by the McGraw-Hill Companies, Inc. All rights reserved.

2. Learning Objectives
Identify the major determinants of individual performance.
Discuss three purposes of performance management.
Identify five criteria for effective performance management systems (pms) .
Discuss four approaches to performance management, specific techniques used in each approach, and the way these approaches compare with criteria for effective performance management systems.
Identify the major determinants of individual performance.
Discuss the three general purposes of performance management.
Identify the five criteria for effective performance management systems.
Discuss the four approaches to performance management, the specific techniques used in each approach, and the way these approaches compare with the criteria for effective performance management systems.
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3. Learning Objectives
Choose the most effective approach to performance measurement for a given situation.
Discuss advantages and disadvantages of different sources of performance information.
Choose the most effective sources for performance information.
Distinguish types of rating errors and explain how to minimize each in a performance evaluation.
Conduct an effective performance feedback session.
Identify the cause of a performance problem.
Choose the most effective approach to performance measurement for a given situation.
Discuss the advantages and disadvantages of the different sources of performance information.
Choose the most effective source(s) for performance information for any situation.
Distinguish types of rating errors and explain how to minimize each in a performance evaluation.
Conduct an effective performance feedback session.
Identify the cause of a performance problem.
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4. Introduction
Performance management is the process through which managers ensure that employees’ activities and outputs are congruent with the organization's goals.
Performance Appraisal is the process through which an organization gets information on how well an employee is doing his or her job.
Performance Feedback is the process of providing employees information regarding their performance effectiveness.
Chapter 8 examines a variety of approaches to performance management. The chapter begins with a model of the performance-management process that examines the system's purposes. Finally, the causes of performance problems are identified. A performance management system has three parts: defining performance, measuring performance, and feeding back performance information.
First, a performance management system specifies which aspects of performance are relevant to the organization, primarily through job.
Second, it measures those aspects of performance through performance appraisal, which is only one method for managing employee performance.
Third, it provides feedback to employees through performance feedback sessions so they can adjust their performance to the organization’s goals.
Performance feedback is also fulfilled through tying rewards to performance via the compensation system such as through merit increases or bonuses.
Because companies are interested in continuous improvement and creating engaged employees—employees who know what to do and are motivated to do it—many companies
are moving to more frequent, streamlined performance reviews.
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5. Performance Management Model
Organizational
Strategy
long & short
term goals&values
Individual
Attributes
(skills, abilities)
Individual
Behaviors
Objective
Results
to understand the process of performance. This model depicts a process model of performance and shows, individuals’ attributes—their skills, abilities, and so on—
are the raw materials of performance. The objective results are the measurable, tangible outputs of the work, and they are a consequence of the employee’s or the work group’s behavior. Another important component of the model is the organization's strategy.Performance planning and evaluation (PPE) systems seek to tie the formal performance appraisal process to the company’s strategies by specifying
at the beginning of the evaluation period the types and level of performance that must be accomplished to achieve the strategy. Then at the end of the evaluation period,
individuals and groups are evaluated based on how closely their actual performance met the performance plan. In an ideal world, performance management systems would
ensure that all activities support the organization’s strategic goals. Situational constraints are always at work within the performance management system. an employee may have the
necessary skills and yet not exhibit the necessary behaviors. Sometimes the organizational
culture discourages the employee from doing effective things. Work group norms
often dictate what the group’s members do and the results they produce. On the other
hand, some people are simply not motivated to exhibit the right behaviors. This often occurs if the employees do not believe their behaviors will be rewarded with pay raises,
promotions, and so forth. Finally, people may be performing effective behaviors, and yet the right results do not follow. Finally, our model notes that situational constraints are always at work within the
performance management system. As discussed previously, an employee may have the necessary skills and yet not exhibit the necessary behaviors. Sometimes the organizational
culture discourages the employee from doing effective things. Work group norms often dictate what the group’s members do and the results they produce. On the other hand, some people are simply not motivated to exhibit the right behaviors. This often occurs if the employees do not believe their behaviors will be rewarded with pay raises, promotions, and so forth. Finally, people may be performing effective behaviors, and yet the right results do not follow. employees must have certain attributes to perform
a set of behaviors and achieve some results. To gain competitive advantage, the
attributes, behaviors, and results must be tied to the company’s strategy. Regardless of
the job or company, effective performance management systems measure performance
criteria (such as behaviors or sales) as precisely as possible. Effective performance management systems also serve a strategic function by linking performance criteria to internal and external customer requirements. Effective performance management systems include a process for changing the system based on situational constraints. Besides serving a strategic purpose, performance management systems also have administrative and developmental purposes.
Situational Constraints
culture & economic
conditions
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6. 3 Purposes of Performance Management
Strategic
Developmental
Administrative
First and foremost, a performance management system should link employee activities with the organization's goals.Performance management is critical for executing a talent management system
and involves one-on-one contact with managers to ensure that proper training and development are taking place.
Performance management is critical for companies to execute their talent management strategy.
Performance‑management information is used for such administrative decisions. Organizations use performance management information (performance appraisals) in many administrative decisions: salary administration (pay raises), promotions, retention–termination, layoffs, and recognition of individual performance
Performance management can be used to develop employees who are ineffective at their jobs.When employees are not performing as well as they should, performance
management seeks to improve their performance. The feedback given during a performance evaluation process often pinpoints the employee’s weaknesses.
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7. Recommendations - Developing an Effective Performance Management System
Mirror the corporate culture and values
Have visible CEO and senior management support.
Focus on the right company performance measures.
Link job descriptions to the performance management system.
Differentiate performance fairly and effectively.
Train managers in performance management.
Communicate the total rewards system.
Require managers to search, offer and acquire regular performance feedback.
Set clear expectations for employee development.
Track effectiveness of the performance management system.
Adjust the system as required.
To make a performance management system that can best meet strategic, administrative, and developmental goals there are several things that should occur.
Table 8.2 provides recommendations for developing an effective performance management system that can meet strategic, administrative and developmental purposes.
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8. 5 Performance Measures Criteria
Strategic Congruence
Validity
Specificity
Strategic congruence is the extent to which the performance management system elicits job performance that is congruent with the organization's strategy, goals, and culture.
Strategic congruence emphasizes the need for the performance management system to guide employees in contributing to the organization’s success. This requires systems flexible
enough to adapt to changes in the company’s strategic posture.
Validity is the extent to which the performance measure assesses all the relevant—and only the relevant—aspects of job performance.Validity
is concerned with maximizing the overlap between actual job performance and the measure of job performance
Reliability refers to the consistency of the performance measure.
Acceptability refers to whether the people who use the performance measure accept it.Acceptability is affected by the extent to which employees believe the performance
management system is fair. Performance management systems that are perceived as unfair are likely to be legally challenged, be used incorrectly, and decrease employee motivation to improve
Specificity is the extent to which a performance measure gives specific guidance to employees about what is expected of them and how they can meet these expectations.Specificity is relevant
to both the strategic and developmental purposes of performance management. If a measure does not specify what an employee must do to help the company achieve its strategic goals, it does not achieve its strategic purpose. Additionally, if the measure fails to point out employees’ performance problems, it is almost impossible for the employees to correct their performance.
Acceptability
Reliability
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9. Comparative Approach Ranking Forced distribution Paired comparison
Simple ranking ranks employees from highest to lowest performer.
Alternation ranking - crossing off the best and worst employees.
Forced distribution
Employees are ranked in groups.
Paired comparison
Managers compare every employee with every other employee in the work group.
The comparative approach to performance requires the rater to compare an individual’s performance with that of others.
1. Ranking is one of the techniques that arrive at an overall assessment of the individual's performance.
a. Simple ranking requires managers to rank employees within their departments from highest performer to poorest performer.
Alternation ranking consists of a manager looking at a list of employees, deciding who is the best employee, and crossing that person’s name off the list.
2. Forced Distribution—The forced distribution methodrequires the managers to put certain percentages of employees into predetermined categories.
3. Paired Comparison—The paired comparison methodrequires managers to compare every employee with every other employee in the work group, giving an employee a score of one every time he or she is considered the higher performer. Employees are ranked by how many points they receive.
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10. Attribute Approach Graphic rating scales Mixed-standard scales
alist of traits is evaluated by a 5-point rating scale.
legally questionable.
Mixed-standard scales
define relevant performance dimensions
develop statements representing good, average, and poor performance along each dimension.
The attribute approach to performance managementfocuses on the extent to which individuals have certain attributes
1. Graphic Rating Scales
a. Graphic rating scalescan provide a number of different points (a discrete scale) or a continuum along which the rater simply places a check mark (a continuous scale).
2. Mixed Standard Scales
a. Mixed standard scalesare developed by defining therelevant performance dimensions with statements representing good, average, and poor performance along each dimension.
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11. Behavioral Approach
Critical incidents approach - requires managers to keep record of specific examples of effective and ineffective performance.
Behaviorally anchored rating scales (BARS)
Behavioral observation scales (BOS)
Organizational behavior modification - a formal system of behavioral feedback and reinforcement.
Assessment centers - multiple raters evaluate employees’ performance on a number of exercises.
The behavioral approach to performance managementattempts to define the behaviors an employee must exhibit to be effective in the job.The various techniques define
those behaviors and then require managers to assess the extent to which employees exhibit them.
Critical Incidents—The critical incident approachrequires managers to keep a record of specific examples of effective and ineffective performance for each employee.
2. Behaviorally anchored rating scales (BARS) specifically define performance dimensions by developing behavioral anchors associated with different levels of performance
Behavioral observation scales (BOS) is a variation of a BARS. They are developed from critical incidents but use a larger number of the behaviors that are necessary for effective performance. Rather than assessing which behavior best reflects an individual’s performance, a BOS requires managers to rate the frequency with which the employee has exhibited each behavior during the rating period. These ratings are then averaged to compute an overall performance rating
Organizational behavior modification (OBM) entails managing the behavior of employees through a formal system of behav­ioral feedback and reinforcement.
Assessment centers can be usedfor measuring managerial performance. During an assessment, individuals usually perform a number of simulated tasks, and assessors observe and evaluate the individual's skill or potential as a manager.
The behavioral approach might be best suited to less complex jobs (where the best way to achieve results is somewhat clear) and least suited to complex jobs (where there are multiple ways, or behaviors,
to achieve success).
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12. Results Approach Goals Management by Objectives
top management passes down company’s strategic goals to managers to define the goals.
Productivity Measurement and Evaluation System (ProMES)
goal is to motivate employees to
higher levels of productivity.
Goals
The results approach to performancemanagement focuses on managing the objective, measurable results of a job or work group. This approach assumes that subjectivity can be eliminated from the measurement process and that results are the closest indicator of one's contribution to organizational effectiveness.
Management by objectives (MBO) is a joint goal‑setting process in which goals are agreed upon between the managers and each subordinate. These goals then become standards used to evaluate the individual's performance. This goal‑setting process cascades down the organization so that all managers are setting goals that help the company achieve its goals. These goals are used as the standards by which an individual’s performance is evaluated. MBO systems have three common components. They require specific, difficult, objective goals.
Productivity measurement and evaluation system (ProMES)- Themain goal of ProMES is to motivate employees to higher levels of productivity. It consists of four steps:
identify the objectives the products, or the set of activities or objectives, the organization expects to accomplish;
(2) the staff defines indicators of the products;
(3) the staff establishes the contingencies between the amount of the indicators and the level of evaluation associated with the amount;
(4) a feedback system is developed that provides employees and work groups with information about their specific level of performance on each of the indicators .ProMES is a means of measuring and feeding back productivity information to personnel.
Hierarchy
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13. Quality Approach
A performance management system designed with a strong quality orientation can:
Assess both person and system factors in the measurement system.
2. Emphasize managers and employees work together to solve performance problems.
3. Involve both internal and external customers in setting standards and measuring performance.
4. Use multiple sources to evaluate person and system factors.
Two fundamental characteristics of the quality approach are a customer orientation and a prevention approach to errors. Improving customer satisfaction is the primary goal of the quality approach.
Customers can be internal or external to the organization. A performance management system designed with a strong quality orientation can be expected to
• Emphasize an assessment of both person and system factors in the measurement system.
• Emphasize that managers and employees work together to solve performance problems.
• Involve both internal and external customers in setting standards and measuring performance.
• Use multiple sources to evaluate person and system factors.
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14. 6 Statistical Process Quality Control Techniques
Process-flow analysis
Cause-and-effect diagrams
Pareto chart
Control chart
Histogram
Scattergram
Process‑flow analysis involves identifying each action and decision necessary to complete work.
A Pareto chart highlights the most important cause of a problem. In a Pareto chart, causes are listed in decreasing order of importance, where importance is usually defined as the frequency with which that cause resulted in a problem. The assumption of Pareto analysis is that the majority of problems are the result of a small number of causes.
In cause-and-effect diagrams, events or causes that result in undesirable outcomes are identified. Employees try to identify all possible causes of a problem. The feasibility
of the causes is not evaluated, and as a result, cause-and-effect diagrams produce a large list of possible causes.
Control charts involve collecting data at multiple points in time. By collecting data at different times, employees can identify what factors contribute to an outcome
and when they tend to occur.
Histograms display distributions of large sets of data and allow data to be grouped into a smaller number of categories or classes. Histograms are useful for understanding the amount of
variance between an outcome and the expected value or average outcomes.
Scattergrams show the relationship between two variables, events, or different pieces of data.Scattergrams help employees determine whether the relationship between
two variables or events is positive, negative, or zero.
As the quality approach illustrates, the most effective way of measuring performance is to rely on a combination of two or more alternatives.
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15. 5 Performance Information Sources
Managers
Customers
Peers
Whatever approach to performance management is used, it is necessary to decide whom to use as the source of the performance measures. Each source has specific
strengths and weaknesses. Five primary sources include managers, peers, subordinates, self, and customers.
Managers are the most frequently used source.
Peers, or coworkers, are excellent sources of information when the supervisor does not always observe the employee.
Subordinates are a valuable source of performance informa­tion when managers are evaluated. They often have the best opportunity to evaluate how well a manager treats employees.
Self‑ratings can be valuable but are not usually used as the sole source of performance information.
In some instances, the customer is often the only person present to observe the employee's performance.
Subordinates
Self
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16. 5 Performance Measurement Rater Errors
Similar to Me
2. Contrast
3. Distributional Errors
4. Halo and Horns
5. Appraisal Politics
Research consistently reveals that humans have tremendous limitations in processing information. Because we are so limited, we often use “heuristics,” or simplifying mechanisms, to make judgments, whether about investments or about people. These heuristics, which appear often in subjective measures of performance, can lead to rater errors. Performance evaluations may also be purposefully distorted to achieve
personal on company goals (appraisal politics).
Five rater errors in performance management include:
“Similar to Me” is the error we make when we judge those who are similar to us more highly than those who are not.
Contrast errors occur when we compare individuals with one another instead of with an objective standard.
Distributional errors are the result of a rater’s tendency to use only one part of the rating scale.
4. Halo errors occur when one positive performance aspect causesthe rater to rate all other aspects of performance positively.Horns error works in the opposite direction: one negative aspect results in the rater assigning low ratings to all the other aspects. Halo and horns errors preclude making the necessary distinctions between strong and weak performance. Halo error leads to employees believing that no aspects of their performance need improvement. Horns error makes employees frustrated and defensive.
5. Appraisal politics refer to evaluators purposefully distorting a rating to achieve personal or company goals. Several factors inherent in the appraisal system and the company culture promote appraisal politics. Appraisal politics are most likely to occur when raters are accountable to the employee being rated, there are competing rating goals, a direct link exists between performance appraisal and highly desirable rewards, if top executives tolerate distortion or are complacent toward it, and if distortion strategies are part of “company folklore” and are passed down from senior employees to new employees.
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17. Reducing Rater Errors and Politics
Approaches to Reducing Rater Error:
Rater error training
Rater accuracy training
Calibration Meetings- attended by managers to discuss employee performance ratings.
Rater error training attempts to make managers aware of rating errors and helps them develop strategies for minimizing those errors. These programs consist of having the participants view
videotaped vignettes designed to elicit rating errors such as “contrast.” They then make their ratings and discuss how the error influenced the rating. Finally, they get
tips to avoid committing those errors. This approach has been shown to be effective for reducing errors, but there is evidence that reducing rating errors can also reduce
accuracy.
Rater accuracy training, also called frame-of-reference training, attempts to emphasize the multidimensional nature of performance and thoroughly familiarize raters with the actual content of various performance dimensions. This involves providing examples of performance for each dimension and then discussing the actual or “correct” level of performance that the example represents. Accuracy training seems to increase accuracy, provided that in addition the raters are held accountable for ratings, job-related rating scales are used, and raters keep records of the behavior they observe
Calibration Meetings- attended by managers to discuss employee performance ratings.Evidence supporting the ratings is provided to
reduce the influence of rating errors andpolitics on performance appraisals.
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18. Improve Performance Feedback
Give feedback frequently, not once a year.
Create the right context for discussion.
Ask employees to rate performance before thesession.
Encourage the employee to participate.
Recognize effective performance through praise.
Focus on solving problems.
Focus feedback on behavior or results, not on the person.
Minimize criticism.
Agree to specific goals and set progress review date.
If employees are not made aware of how their performance is not meeting expectations, their performance will almost certainly not improve. In fact, it may get worse. Effective managers provide specific performance feedback to employees in a way that elicits positive behavioral responses. To provide effective performance feedback managers should consider the following recommendations.
Performance Feedback is a process that is complex and provokes anxiety for both the manager and the employee.
Feedback should be given frequently, not once a year.
Create the right context for the discussion.
Ask employee to rate his or her performance before the session.
Encourage the employee to participate in the session.
Focus on solving problems.
Focus feedback on behavior or results, not on the person.
Minimize criticism.
Agree to specific goals and set progress review date.
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19. 5 Factors to Consider When Analyzing Poor Performance
Input
5 Factors to
Consider
When Analyzing
Poor Performance
Employee
Characteristics
Performance
Standards/
Goals
Many different reasons can cause an employee’s poor performance. The five categories to consider include input, employee characteristics, feedback, performance standards/goals, and consequences.
Consequences
Feedback
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20. Managing Performance of Marginal Performers
Solid performers
High ability and motivation; provide development
Misdirected effort
Lack of ability but high motivation; focus on training
Underutilizers
High ability but lack motivation; focus on interpersonal abilities
Deadwood
Low ability and motivation; managerial action, outplacement, demotion, firing.
Marginal employees are those employees who are performing at a bare minimum level because of a lack of ability and/or motivation to perform well. Managers need to take into account whether employees lack ability, motivation, or both in considering ways to improve performance. To determine an employee’s level of ability, a manager should consider if he or she has the knowledge, skills, and abilities needed to perform effectively. Lack of ability may be an issue if an employee is new or the job has recently changed. To determine employees’ level of motivation, managers need to consider if employees are doing a job they want to do and if they feel they are being appropriately paid or rewarded. A sudden negative change in an employee’s performance may indicate personal problems.
Employees with high ability and motivation are likely good performers (solid performers)
Managers should not ignore employees with high ability and high motivation. Managers should provide development opportunities to keep them satisfied and effective. Poor performance resulting from lack of ability but not motivation (misdirected effort) may be improved by skill development activities such as training or temporary assignments. Managers with employees who have the ability but lack motivation (underutilizers) need to consider actions that focus on interpersonal problems or incentives. These actions include making sure that incentives or rewards that the employee values are linked to performance and making counseling available to help employees deal with personal problems or career or job dissatisfaction. Chronic poor performance by employees with low ability and motivation (deadwood) indicates that outplacement or firing may be the best solution.
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21. Withstand Legal Scrutiny
Conduct a valid job analysis related to performance.
Base system on specific behaviors or results.
Train raters to use system correctly.
Review performance ratings and allow for employee appeal.
Provide guidance/support for poor performers.
Use multiple raters.
In discrimination suits, the plaintiff often claims that the performance ratings were subjective and that the rater was biased and influenced by gender or racial stereotypes. Because of the potential costs of discrimination and unjust dismissal suits, an organization needs to determine exactly what the courts consider a legally defensible performance management system. Based on reviews of such court decisions, these are six characteristics of a system that will withstand legal scrutiny.
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22. Performance Management: Electronic Monitoring
Electronic tracking systems include:
Hand and fingerprint recognition systems
Global positioning systems (GPS)
Systems thattrack employees using handheld computers and cell phones
Potential increased efficiency and productivity benefits
These systems present privacy concerns.
An increasing trend in companies is using sophisticated electronic tracking systems to ensure that employees are working when they should be.
Some argue that electronic tracking systems are needlessly surveilling and tracking employees when there is no reason to believe that anything is wrong. Advocates counter that these systems ensure that time is not
abused, they improve scheduling, and they help managers identify lazy workers. To avoid the potential negative effects of electronic monitoring, managers must communicate why employees are being monitored.
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23. Summary
Measuring and managing performance are key to gaining competitive edge.
Performance management systems (PMS) serve strategic, administrative, and developmental purposes.
PMS should be evaluated against the criteria of strategic congruence, validity, reliability, acceptability and specificity.
Effective managers need to
be aware of the issues involved in determining best methods.
feed performance information back to employees
take action based on causes for poor performance: ability, motivation or both.
be sure that PMS can meet legal scrutiny
Measuring and managing performance is a challenging enterprise and one of the keys to gaining competitive advantage. Performance management systems serve strategic, administrative, and developmental purposes— their importance cannot be overestimated. A performance measurement system should be evaluated against the criteria of strategic congruence, validity, reliability, acceptability, and specificity. Measured against these criteria, the comparative, attribute, behavioral, results, and quality approaches have different strengths and weaknesses.
Thus, deciding which approach and which source of performance information are best depends on the job in question. Effective managers need to be aware of the issues involved in determining the best method or combination of methods for their particular situations. In addition, once performance has been measured, a major component of a manager’s job is to feed that performance information back to employees in a way that results in improved performance rather than defensiveness and decreased motivation. Managers should take action based on the causes for poor performance: ability, motivation, or both. Managers must be sure that their performance management system can meet legal scrutiny, especially if it is used to discipline or fire poor performers.
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